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Prioritizing debt consolidation may seem like a good idea if you really want to improve your financial situation faster. However, you need to understand that it is only applicable to certain situations. Yes, there are situations when paying off all your debts at once is not a good idea.

Do not get us wrong. Getting rid of debt is generally a good idea. But you have to realize that there are instances when it will only make other financial goals harder to reach or it will cost you more in terms of penalties and charges.

While this is a reality of prioritizing debt consolidation, that does not mean there are no people trying to pay off their debts as soon as possible. In fact, one survey revealed that 66% of their respondents considered paying off debt as a priority. This was even greater than the need to fund their children’s college fund or their retirement savings.

It is true that the personal finances of every individual will vary. So if you really want to prioritize your debt payments, that is up to you. But to make sure that you can maximize the benefits of your chosen debt relief program, you need to understand how debt consolidation can affect your overall financial position.

Important rules when prioritizing debt consolidation

As you are prioritizing debt consolidation, you need to get to know how it works completely. First of all, the consolidation means you will be using credit to pay off all your original debts. This will basically combine all your balance under one credit account. If you do it correctly, you will even get better terms – that means a lower interest rate and no fees.

Given these changes, you need to analyze how that will affect your current financial position as a whole.

Paying off credit card debts

Definitely, this will have a positive effect on your credit card debts. This is the type of debt that has the highest interest rate. If you can get a lower rate, it is possible for you to save a lot of money. Not only that, it may even be possible to get rid of credit card debt within the year.

So prioritizing debt consolidation for credit card debts is actually a good idea. This is a debt that you do not need to think twice about paying off immediately. The longer it takes for you to pay it off, the more damage will bring to your financial situation.

But what about your emergency fund? Well, you can prioritize credit card debts over this but you might want to have at least a couple of hundred dollars in your fund first.

All the other debts

Now, what do you do for all the other debts that you owe? Debts like your mortgage, car loans, personal loans, medical bills, and even student loans. Will prioritizing debt consolidation for these debts be a good move?

That depends on a couple of things. First is the prepayment penalty. If you will be required to pay a lot, you might want to reconsider prioritizing debt consolidation. But if you really plan to use your home in debt consolidation, that could work. As long as you have enough equity to cover all your debts and you have a good credit score to get the lowest interest rate, then you should be okay. You can opt to prioritize your debt payments. The same is true for the other debts that you owe.

You should also ask yourself if you will save more money if you pay off the debts now or if you just use the extra money to invest. If you will save more by investing, it might be a better idea to not prioritize debs for now.

Another consideration is your emergency fund. If there is no immediate need to really pay off your debts for now, it might be better to prioritize saving up for your emergency fund. Once you have enough in this fund, you can already start prioritizing debt consolidation.

Dangers of prioritizing debt consolidation

The thing about putting your debt payment first is it will limit your money. This is why you need to be careful about choosing what you should prioritize.

According to reports, 72% of parents reveal that paying down debt is their top priority right now. In particular, they want to make debt management a priority. As you get older, you will use debt and the chances of you having a lot of them will be very high. This is probably why prioritizing debt consolidation is popular among young parents. This is the time when they invest in their home or when they start spending more because of their kids. When you want to build a stable future for your kids, you need to put all your debts in order.

But prioritizing debt consolidation, even if you want to do it for your future also poses a couple of dangers. Here are some of them.

Insufficient emergency fund

Regardless of your financial situation, you need to make sure you have enough emergency fund. Unless you have enough of this, do not prioritize your debt payments. Otherwise, if there is an unexpected situation that happens, you might end up borrowing again.

Inability to save for retirement

Another reason to not prioritize debt consolidation is when you do not have enough retirement fund. As you get older the need for a bigger retirement fund is a must. You have a shorter period left to save up for it. Starting early is a good idea – even if it is only a small amount because you can take advantage of the compound interest. The earlier you start, the more you will benefit from the growth brought about by the compound interest.

Passing up an opportunity to invest

Finally, if prioritizing debt consolidation means you are passing up on an investment that will make you earn more – then it might be beneficial to think twice about your options. If you will not really gain anything by paying some debts in advance through debt consolidation, then might as well leave it as is. Then you can find the extra funds to grow your personal finances.

Secured debt consolidation is one of your options to get out of debt. It is basically a secured loan that you can borrow so you can consolidate your multiple debts. When a loan is secured, that means it is borrowed against collateral. This gives the lender a sense of security. In case you fail to pay back the loan, they will just get the collateral as payment.

What is great about this type of debt consolidation strategy is that you can get the loan with low interest. This is a result of the collateral provided. This is why this is a great option to consolidate credit card debt – which is notorious for their high-interest rates. The low-interest rates will help you save a lot of money in the long run.

Types of secured debt consolidation

There are a few ways to go about a secured type of debt consolidation. Here are some of them worth looking into to help you decide on the best one that fits your current situation.

Real Estate

This is the most popular option for secured debt consolidation. You will use the equity of a property that you own. Reports reveal that the increasing value of home equity is encouraging homeowners into tapping that asset. The equity is the value of the house or property that belongs to you. This is why real estate owners can use their properties even if they have yet to completely pay off their mortgage. They can borrow against the equity of the house.

There are a couple of ways to do this.

Home Equity Loans. This involves a loan that is borrowed based on the equity that you paid in your home or property. If your equity is at $100,000, you can borrow up to a certain level – like until $80,000. When you borrow a home equity loan, this is usually considered as a second loan that is separate from your initial mortgage. You will end up with two loans.

Cash Out Refinancing. This will also borrow against the equity of your home. However, it will not be considered as a second loan. You will be borrowing a bigger mortgage so you can cash out your equity. You will still be left with one mortgage but with a bigger balance.

Vehicle

Another option is to use your vehicles. Even if you haven’t finished paying it off, you can also use this as a secured debt consolidation option. Like the real estate, you can only borrow against the value that you have paid off. Here are the two options to do this.

Cash Out Financing. You can refinance based on the current value of the vehicle. You will be given the cash value and you can use this to pay off your multiple debts. This will leave you with a bigger loan but it should be easier to pay off because you only have one payment to worry about. Not only that, if you borrowed the refinancing with a better credit score, you will enjoy a lower interest rate.

Title loans. This is like pawning the title of your car. This is considered as the “payday loan” of auto loans. While it will not require a credit check, it will leave you with a high interest rate on the loan. Just make sure that you have a plan to pay back the loan so you will not be caught up in the debt cycle that is usually associated with these type of debts. This is best for those with an urgent need for cash. If there is no urgency, you might want to go for the other option.

Retirement savings

This might be a bit more controversial compared to the other types of secured debt consolidation. Some people will not be open to using their 401(k) because it will seem like compromising their future. But if you really want to be free from debt, specifically high-interest rate debts, this is a great tool to use. In fact, reports reveal that the top reason to borrow from a 401(k) is to pay off credit card debts.

Experts encourage consumers to use this as a last resort if none of the options above is applicable. This is your money and if you do it correctly, your retirement might not suffer. You just have to make sure that you get to know the company that services your 401(k) policy. Different companies have varying rules and terms when you get a 401(k) loan. Make sure you get to know it so you can minimize the risks involved with this debt consolidation option.

Here are some of the pitfalls that you need to avoid when it comes to secured debt consolidation.

You are putting an asset at risk. Your collateral is an asset that has a positive effect on your financial position. If you fail to pay back the secured loan, you will lose that collateral. This is why you need to be sure that you can pay back your loan so you will never lose your asset.

The new credit will bring your credit score down. This is a new account after all. Obviously, your credit utilization rate will be affected. The added balance will lower your credit score. While this may seem bad, it will only be temporary. You just have to make sure that you can meet your payments regularly so it will slowly but surely bring your score up.

There is a possibility of a longer repayment. Of course, this will depend on the terms of the new loan. You can ask to shorten the repayment period but that would mean you have to pay more each month. But if you can only afford a lower monthly payment, you need to be ready to pay for a long time. This will also cost you more in the long run.

If you can avoid these pitfalls, you can make your secured debt consolidation efforts a success. As you pay back the debt, you are regaining the asset that you put up as collateral and you are getting yourself closer to debt freedom.

We all want our debt consolidation program to be successful. But to make that possible, you need to follow a certain set of rules first. Unless you adhere to these guidelines, you will be more likely to make mistakes or be discouraged after a simple setback.

When you know the rules and you strictly abide by it, you can make decisions with more confidence. Even when something bad happens, you know how to act on it to resolve it.

According to reports, Millennials carry a lot of debt – an average of $36,000. While it may seem like a big amount, it is revealed that paying off debt is not their priority. Their biggest financial goal is saving money that will help them reach a milestone in their life – like marriage or owning their own home.

With all the debt that they owe, it is evident that they should do something to solve their financial issues. There are many ways you can get out of debt and one of them is a debt consolidation program.

5 debt consolidation rules to follow

If you plan on using this debt relief strategy to get out of debt, you need to follow these 5 rules.

Make it realistic

When we say realistic, this means you have to make sure that you can afford the monthly payments. To do this, you need to get to know your options and your own financial situation. Unfortunately, not everyone tries to understand what their options are. According to reports, most Americans are not aware of how beneficial balance transfer cards are. At least, this is true for those who will really benefit from it. When you plan on using debt consolidation, you need to know that there are many options for doing it. You should research the perfect option that suits your financial circumstances. The primary concern should be affordability. That will help you make your debt consolidation program realistic.

Create a new budget and stick to it

Once you have the type of debt consolidation that you will use, you need to create a budget that will compliment that. When you use a budget plan, you are more in control of your finances. This will allow you to make smarter choices about your money – including your debt relief options. While you are completing the debt consolidation program, you will go through a lot of difficulties. When you have your budget plan updated, you can easily track your expenses and make adjustments to avoid compromising your debt relief efforts. It will also help you track your spending so you will never have to run out of debt payment funds.

Set up milestones with appropriate rewards

Another rule that you should follow is setting up rewards. You need to set up milestones that will mark small victories on your road towards debt freedom. For instance, after you have paid a quarter of the debt, give yourself a small reward. Or you give yourself a reward after paying $1,000 worth of debt. These rewards are meant to motivate you to go through another set of payments until you reach the next milestone and reward. There is a higher chance of you completely paying off your debts.

Feel accountable

Sometimes, you need to feel accountable for your debt payments to encourage yourself to pay it off. When you tell someone about your debt relief efforts, there is pressure to succeed. If you fail, someone will know about it. Feel free to tell your partner or the whole family about your endeavor to get out of debt. If your spouse knows that you are making an effort to fix the mess of your debts, that can even save your marriage – but only if you succeed in completely getting yourself out of your debt situation.

Keep in mind why you are doing this

Finally, you need to always keep in mind why you are doing this. Among the other rules, this is what will really sustain you. After consolidating debts, you still have a long way to go in your debt consolidation program. You still have to pay everything off. You want to make sure that you can complete all the payments so you can finally be free from the restrictions brought about by your credit obligations. If your reason to get out of debt is so you can buy your own house someday, print a visual representation of this. It is another way to motivate yourself to get out of debt.

Additional reminders while completing your debt payments

Apart from the 5 rules, there are other reminders that you need to consider when using a debt consolidation program.

Stop using debt

If you really want to get your finances in order, you have to stop using debt. Do not worry because this is only temporary. You still need to use debt every now and then if you want to keep your credit score up. But while you are still in the midst of a debt relief program, you have to keep yourself from borrowing more money. Otherwise, it will take you even longer to be completely debt free.

Track your progress

You should also track the progress of your debt relief program. There are many reasons why this rule is beneficial. First of all, it will help you monitor your payments. That way, you can easily check if you missed out on payments. Another benefit is you can see how much you have paid off and how long you have to go in terms of the repayment plan. For most people, knowing where they specifically stand in the debt relief program motivates them. If they focus on how much they have paid off, it can serve as an encouragement to keep going.

Increase payments when possible

Another rule that you may want to follow is increasing your payments whenever it is possible. This is one of the ways you can be smart when borrowing debt consolidation loan. The bigger the monthly payments, the faster you can get yourself out of debt.

Do not be discouraged by setbacks

Finally, it is important to keep yourself from feeling discouraged whenever you encounter setbacks during the program. This is not something that you can avoid. Life can throw unexpected events your way and it can compromise your debt payments. If there are unplanned expenses, do not let it stress you out. That is not enough reason for you to quit your debt consolidation program. You can always talk to the lender or creditor to allow you to pay a lower amount for a couple of months.